FI 412 TEST 1 UNIVERSITY OF ALABAMA QUESTIONS ANSWERED CORRECTLY GRADED A+
When yield curves are steeply upward-sloping - Answers long-term interest rates are above
short-term interest rates.
An open market sale of securities by the Fed will - Answers decrease liabilities of the Fed and
not affect assets of the banking system
If the Federal Reserve wants to expand reserves in the banking system, it will - Answers
purchase government securities
According to the expectations theory of the term structure - Answers interest rates on bonds of
different maturities move together over time.
A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking system and
a(n) ________ in the monetary base - Answers increase; increase
If the expected path of one-year interest rates over the next four years is 5 percent, 4 percent, 2
percent, and 1 percent, then the pure expectations theory predicts that today's interest rate on
the four-year bond is - Answers
According to the expectations theory of the term structure, - Answers when the yield curve is
steeply upward-sloping, short-term interest rates are expected to rise in the future.
B) when the yield curve is downward-sloping, short-term interest rates are expected to decline in
the future.
Treasury bonds are subject to ________ risk but are free of ________ risk. - Answers interest-rate;
default
Call provisions will be exercised when interest rates ________ and bond values ________. -
Answers fall; rise
Callable bonds usually have a higher yield than comparable non-callable bonds. - Answers true
Convertible bonds are attractive to bondholders and sell for a higher price than comparable
nonconvertible bonds. - Answers true
Preferred stockholders hold a claim on assets that has priority over the claims of - Answers
common stockholders, but after that of bondholders
Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of
Auto Zone stock if the retailer's earnings per share is projected to be $1.85? - Answers $37
If a 15 year Treasury Bond is "stripped" (into Treasury STRIPS), the number of securities will be
trading after the process is_____? (Assuming semiannual coupon payment) - Answers 31
, Goldman Sachs repos $10 million par value of a Treasury note to J.P. Morgan for 30 days. The
market value of this Treasury note is $12 million. If J.P. Morgan takes a 5% haircut, and the repo
rate is 3%, how much does Goldman Sachs need to pay back in 30 days in order to receive the
Treasury note? (repo rate is quoting on a 360 day basis) - Answers $11.4285 million
The Department of Treasury announced on Thursday that it would auction $3 billion par value
182-day Treasury Bills. The following bids (both competitive and non- competitive) were
received from the primary dealers. Please state below which primary dealers will receive the
awards, what is the price, and what is the quantity that each primary dealer receives - Answers 1.
Look at largest bid amount
2. Look at bid price associated with that price
3. Any prices above chosen bid price are viable
The principal-agent problem - Answers would not arise if the owners of the firm had complete
information about the activities of the managers.
If face value and selling price of a bond are the same, - Answers YTM is same as coupon rate
A perpetuity pays you $200 each year forever. If the price of this perpetuity now is $4,000, what
is the yield to maturity for this loan? - Answers 5%
If price of a bond is below face value, then - Answers YTM is greater than coupon rate
In the presence of principal-agent problem, equity contract is superior to debt contract -
Answers False
What problem of debt contract is shown when one switches projects based off a better payoff
when project is being financed by debt? - Answers Risk Shifting
Formula for calculating price tomorrow - Answers P= C(1/i+1/i(1+i)^n+F/(1+i)^n
Sum of weights should equal... - Answers 1
Financial markets have the basic function of___________ - Answers bringing together people with
funds to lend and people who want to borrow funds. B) generating liquidity
Which of the following can be described as involving direct finance? - Answers A corporation
sells its stock to investors through an IPO.
Which of the following can be described as involving indirect finance? - Answers A corporation
takes out loans from a bank. A pension fund manager buys stocks from the secondary market.
Which of the following statements about the characteristics of debt and equity are true? -
Answers A)They both can be long-term financial instruments.
When yield curves are steeply upward-sloping - Answers long-term interest rates are above
short-term interest rates.
An open market sale of securities by the Fed will - Answers decrease liabilities of the Fed and
not affect assets of the banking system
If the Federal Reserve wants to expand reserves in the banking system, it will - Answers
purchase government securities
According to the expectations theory of the term structure - Answers interest rates on bonds of
different maturities move together over time.
A discount loan by the Fed to a bank causes a(n) ________ in reserves in the banking system and
a(n) ________ in the monetary base - Answers increase; increase
If the expected path of one-year interest rates over the next four years is 5 percent, 4 percent, 2
percent, and 1 percent, then the pure expectations theory predicts that today's interest rate on
the four-year bond is - Answers
According to the expectations theory of the term structure, - Answers when the yield curve is
steeply upward-sloping, short-term interest rates are expected to rise in the future.
B) when the yield curve is downward-sloping, short-term interest rates are expected to decline in
the future.
Treasury bonds are subject to ________ risk but are free of ________ risk. - Answers interest-rate;
default
Call provisions will be exercised when interest rates ________ and bond values ________. -
Answers fall; rise
Callable bonds usually have a higher yield than comparable non-callable bonds. - Answers true
Convertible bonds are attractive to bondholders and sell for a higher price than comparable
nonconvertible bonds. - Answers true
Preferred stockholders hold a claim on assets that has priority over the claims of - Answers
common stockholders, but after that of bondholders
Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of
Auto Zone stock if the retailer's earnings per share is projected to be $1.85? - Answers $37
If a 15 year Treasury Bond is "stripped" (into Treasury STRIPS), the number of securities will be
trading after the process is_____? (Assuming semiannual coupon payment) - Answers 31
, Goldman Sachs repos $10 million par value of a Treasury note to J.P. Morgan for 30 days. The
market value of this Treasury note is $12 million. If J.P. Morgan takes a 5% haircut, and the repo
rate is 3%, how much does Goldman Sachs need to pay back in 30 days in order to receive the
Treasury note? (repo rate is quoting on a 360 day basis) - Answers $11.4285 million
The Department of Treasury announced on Thursday that it would auction $3 billion par value
182-day Treasury Bills. The following bids (both competitive and non- competitive) were
received from the primary dealers. Please state below which primary dealers will receive the
awards, what is the price, and what is the quantity that each primary dealer receives - Answers 1.
Look at largest bid amount
2. Look at bid price associated with that price
3. Any prices above chosen bid price are viable
The principal-agent problem - Answers would not arise if the owners of the firm had complete
information about the activities of the managers.
If face value and selling price of a bond are the same, - Answers YTM is same as coupon rate
A perpetuity pays you $200 each year forever. If the price of this perpetuity now is $4,000, what
is the yield to maturity for this loan? - Answers 5%
If price of a bond is below face value, then - Answers YTM is greater than coupon rate
In the presence of principal-agent problem, equity contract is superior to debt contract -
Answers False
What problem of debt contract is shown when one switches projects based off a better payoff
when project is being financed by debt? - Answers Risk Shifting
Formula for calculating price tomorrow - Answers P= C(1/i+1/i(1+i)^n+F/(1+i)^n
Sum of weights should equal... - Answers 1
Financial markets have the basic function of___________ - Answers bringing together people with
funds to lend and people who want to borrow funds. B) generating liquidity
Which of the following can be described as involving direct finance? - Answers A corporation
sells its stock to investors through an IPO.
Which of the following can be described as involving indirect finance? - Answers A corporation
takes out loans from a bank. A pension fund manager buys stocks from the secondary market.
Which of the following statements about the characteristics of debt and equity are true? -
Answers A)They both can be long-term financial instruments.
